More on Lori Singleton-Clarke’s “legislative grace.”

Did you know that tax deductions are “a matter of legislative grace”? That’s been the rule since 1940. (1)

Happily for Maryland Nurse Lori Singleton-Clarke, she was able to get her share of grace as dispensed by the U.S. Tax Court in LORI A. SINGLETON-CLARKE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent, decided December 2, 2009.

Because of the considerable interest generated on The Irreverent Lawyer by Singleton-Clarke’s case, I decided to do a follow-up and provide a few more details including the link to the Court’s Opinion, Lori A. Singleton-Clarke.

But before anyone takes her case and wants to run with it, let me quote my Navy pilot buddy, “Here’s an important safety tip.”

By rule, Sect. 7463(b), Singleton-Clarke’s case is “not reviewable by any other court, and this opinion shall not be treated as precedent for any other case.”

The Issue.

The issue the U.S. Tax Court considered was whether Singleton-Clarke was entitled to deduct $14,787.00 in education expenses incurred in 2005 in connection with getting her MBA with a specialization in health care management (MBA/HCM).

Singleton-Clarke enrolled in the MBA program to become more effective in her job. And while the degree was not required for her job, she believed it would make her more credible and put her on a level playing field when working with highly educated doctors.

The Rules.

There’s a well-settled rule that ordinary and necessary trade and business operational expenses are deductible. The trick is making sure the expenses are common, frequent, and helpful to the taxpayer’s business and that they’re directly connected to that trade or business. Although Singleton-Clarke was not running a business, the law generally permits an employee’s performance of services to be considered a trade or business.

But what about educational expenses? Interestingly and almost illogically, the way the law works is if the education qualifies the taxpayer for a new trade or business, the education expenses arenot deductible. So to get her deduction, Singleton-Clarke’s challenge was to persuade the Court that her expenses were for purposes of her present employment and not to qualify for a new job.

Specifically, the rule is that a taxpayer may deduct education expenses as ordinary and necessary business expenses if the education– (1) Maintains or improves skills required by the individual in his employment or other trade or business, or(2) Meets the express requirements of the individual’s employer, or the requirements of applicable law or regulations, imposed as a condition to the retention by the individual of an established employment relationship, status, or rate of compensation. Sec. 1.162-5(a)(1) and (2), Income Tax Regs.

Does the education qualify the taxpayer for a new trade or business?

If the answer is yes, the education expenses are not deductible. This was the hill Singleton-Clarke climbed. And she did it without benefit of legal counsel. She had to persuade the Court that her expenses were for purposes of her present employment and not to qualify for a new job.

The Court makes an objective inquiry into the facts. It compares the taxpayer’s work experiences and qualifications before and after the education. In particular, the Court wants to make sure that the education sought by the taxpayer is helpful to her qualifications and not essential to them.

Here is where Singleton-Clarke’s exceptional work history and recognition helped turn the tide for her. She is a winner of multiple performance awards. She had even been recognized on 3 separate occasions for her work by the Governor of Maryland. Moreover, Singleton-Clark had worked her way up the ladder to Director of Nursing, supervising well over 110 employees. Hiring requirements and her job experience were regarded as “central considerations” in her case.

Did Singleton-Clarke’s MBA qualify her for a a new trade or business?

The I.R.S. argued that Singleton-Clarke’s MBA/HCM did qualify her for a new trade or business. The IRS contended “the tasks and activities she was qualified for before she obtained the degree are different than those which she is qualified to perform afterwards.”

The Court disagreed. An MBA does not qualify a person for a professional license like, for example, a law degree. (This is why lawyers are out of luck. Law school expenses aren’t deductible since a law degree qualifies the taxpayer for the new business of being a lawyer).

Fact-sensitive analysis.
But whether one’s pursuit of an MBA automatically qualifies for the deduction is another matter. When dealing with the taxman, there’s little that’s automatic.

Each case is different, requiring a fact-sensitive analysis. To make things even more difficult, there are cases on both sides of deductibility. In Singleton-Clarke’s case, the Court pointed to “whether the taxpayer was already established in their trade or business.” This was the decisive factor for Singleton-Clarke.

The ruling.

In ruling for Singleton-Clarke, the Court believed “her facts and circumstances far more closely resemble the cases that allowed a deduction for pursuing an MBA. Singleton-Clarke worked for 1 year as a quality control coordinator. She had more than 20 years of directly related work experience before beginning her MBA/HCM program. And her career and work experience have been stellar.

Explaining its decision, the Court concluded, In summary, the MBA/HCM may have improved petitioner’s preexisting skill set, but objectively, she was already performing the tasks and activities of her trade or business before commencing the MBA. For all of the above reasons, we find that petitioner’s MBA/HCM did not qualify her for a new trade or business, and we hold, therefore that petitioner may deduct her education expenses for 2005.

(The FairTax does not and I repeat, does not do away with the Medicare & Social Security programs. The only change is that these programs will be funded by The FairTax)

Albert Einstein has been quoted as stating that the “the hardest thing in the world to understand is the income tax”. What is hard for me to understand is why we haven’t stepped up to the plate to create a national discussion on True Fundamental Tax Reform/Replacement and allow The FairTax to compete as the replacement?

If you want the United States of America to be better then you will take a moment to learn more about The FairTax. And guess what Lori? The FairTax makes educational tuition a tax-free expenditure of tax-free income.

Thank you for this venue to express my opinions.

Adam Yomtov
Volunteer New York State Director
Americans for Fair Taxation

It allows workers to keep 100% of their pay, with nothing withheld for the IRS or for Social Security and Medicare payments.

It is revenue neutral with the present income and payroll tax system, funding the federal budget at current levels.

It shifts the tax to consumption. Records show that consumption is more stable than income, therefore the tax revenue stream is likely to be a more stable and predictable amount.

It is progressive, a “prebate” of the tax amount up to the poverty level is given to everyone. This means that those spending below the poverty level have a net gain because the “prebate” exceeds the amount paid in taxes. (Under the present system the working poor pay the 7.65 percent payroll tax even if they get a full refund of income tax withheld.)

It doesn’t tax pre-owned items – clothes, cars, homes. Only new items are taxed when sold by a business to an individual.

It is expected to remove an average of 22% of the cost of American made goods by removing the built-in payroll tax (the other 7.65% of earnings that employers pay), corporate income tax, and other business taxes that are now passed to consumers as an “embedded” tax of approximately 22% due to the cascading of income and payroll taxes paid by U.S. employers, at every step of production, to the U.S. Treasury. Competition will cause prices to fall by approximately that amount, on average.

It allows families to save more for home ownership, education, and retirement. An average family making $50,000 will have $7,500 more spendable income.

It removes the need for formal accounts of the 401(k), IRA, HSA, etc., varieties. Anyone, rich or poor, will be able to set up any kind of savings or investment account without regard to taxes or the government. No special knowledge of tax law is necessary.